Selling Your Business – Dealing With The Landlord
Most retailers will at some stage wish to sell their business and enjoy the fruits of their labour. Sounds straight forward doesn’t it, simply talk to a business broker, place the business on the market, sell it and the rest is merely a formality. Well aside from the fact that the market is a little soft at present, the last part I refer to as “the rest”, is not a merely a formality. It is probably the most overlooked aspect of the sale process and often a cause of major frustration.
I am talking about the necessity of dealing with your landlord during the sale process (assuming you don’t own your retail premises). During my time acting on behalf of landlords, I was involved in many business sales that fell over at the last moment, due to the business owner not involving the landlord and simply thinking that they would give the transaction their tick of approval without any hesitation. This could not have been further from the truth. If you lease your premises (as most retailers do), the landlord needs to be consulted as soon as possible after entering into serious negotiations with a prospective purchaser.
Where a retail business is being sold, the purchaser will need some form of security in the form of a lease which would be held by the original business owner (lessee). As the lessee is selling their business, they will need to introduce the prospective purchaser to the landlord who will more than likely ask them to complete an application to assign (transfer) the lease to the assignee (purchaser).
The landlord may accept or reject that application based on specific criteria (usually business experience and financial standing), however they must act expeditiously at all times. Each state and territory within Australia has it’s own retail lease legislation which deals with lease assignments, so it is important that you understand the specific legislation that applies to your situation, as there are differences which you should be aware of.
If the landlord approves the assignment, the purchaser executes the relative paperwork and the lease is then transferred (assigned) from the original business owner (assignor) to the purchaser (assignee). So, does this mean you have no ongoing liability for the lease? Not necessarily….if you are the guarantor under the lease, you still have an ongoing legal liability in terms of meeting obligations under the lease, if the assignee defaults. Not many business owners are aware of this, in fact I have even dealt with solicitors who haven’t addressed this issue properly with the retail clients.
It doesn’t seem fair does it? You sell the business in good faith and without your knowledge the new owners could run the business into the ground, default on rent payments and suddenly you are liable for their failure. The good news is there are ways around this issue – most states and territories’ retail lease legislation contain provisions which release the original lessee from ongoing liability, provided that certain actions are taken. It is important that you consult your solicitor about this issue to ensure that your interests are protected.
Another way of freeing yourself from any ongoing liability (and I prefer this), is surrendering your lease and having your landlord enter into a fresh new lease with the purchaser. In this situation the lease is not assigned, so there is no liability whatsoever. Some landlords are happy to progress a sale this way, however others are not, but it is something to think about.
The key issues to consider when selling your retail business (aside from the sale price) are seeking competent legal advice and engaging with your landlord sooner rather than later.